I’m mad. Met Life recently announced a 58% increase in premiums on my long-term care insurance. 58%! Genworth Financial, John Hancock and other companies have had similar premium increases while other companies have simply quit writing these policies altogether. These types of policies typically give the insurance company the right to raise premiums, not on an individual policyholder, but on a ‘class’ of policyholders. Policyholders have seen premiums rise modestly over the years but fifty-plus percent increases have caught everyone off guard. Policyholders are rightfully upset and some are considering whether they should drop the coverage.
Why it happened
These radical premium increases were caused by a number of factors but three of the most critical are:
1. We are living longer in poor health. Medical science is keeping us alive much longer but not necessarily healthy. So people are living longer but often in poor health. In order to qualify for benefits under a long-term care policy the policyholder must be unable to perform some stated number of the ‘activities’ of daily living. While the definitions vary by policy, generally they include: eating, bathing, dressing, toileting, transferring and continence. Once a policyholder qualifies for benefits, many are living long enough to use up all of the policy benefits.
2. Lapse rates lower than expected. A key factor actuaries use to calculate premiums for life insurance, disability insurance and long-term care insurance is the lapse rate on policies. Actuaries assume that a certain percentage of people who buy a policy will terminate it before collecting any benefits. In the case of long-term care insurance, the actuaries simply got it wrong. Perhaps a significant factor is that just about everyone knows someone, a family member or friend, who has had to deal with long-term care issues. One thing that I’ve noticed is that everyone who has a significant healthcare issue wants to stay at home as long as possible and that’s a very expensive proposition. We had one case where both the parents needed around-the-clock care and the cost was about $200,000 per year. So folks understand the potential devastation self-insuring can have on the family finances and have chosen to keep their insurance.
3. Poor investment performance. Insurance companies invest a large portion of their assets in fixed income securities such as bonds. Everyone knows about the dismal returns currently being paid on high quality bonds, CDs and money market accounts. Most intermediate, high quality bonds are currently paying under three percent while the historical norm is 4.5% to 5.5%. That’s a big arithmetic error for the insurance company actuaries and has been a significant contributor to their losses.
What you should do
A lot of policyholders are mad about the premium increases and are considering cancelling their policy. I would caution you to reconsider. Understand that the insurance company is losing money because they are paying out substantially more claims than anticipated. According to long-term care expert, Babs Hart, “If you were to price your original policy today at the original age you purchased it, the same policy would be much more expensive simply because that’s what it takes to cover the risk associated with long-term care services. It’s also true that if you’ve owned your policy for a number of years, that original policy with its more liberal terms and benefits is likely not available today”.
I also think you should anticipate that the insurance companies will continue to raise premiums in the future so you should prepare and budget accordingly.
A possible alternative
People detest spending their hard-earned money on insurance premiums with the possibility of never receiving a benefit. The insurance companies have developed a hybrid policy that combines life insurance with long-term care insurance. In essence, what you don’t use as long-term care benefits, your beneficiaries will collect as life insurance. For example, you purchase one of these hybrid polices where the death benefit if $200,000. During your lifetime, you use $150,000 of long-term care benefits. At your death, your beneficiaries would collect $50,000 of life insurance proceeds. If you never used any long-term care benefits, they would collect the full $200,000.
I have long-term care insurance on myself and my wife and I plan to keep the policies. If you own long-term care insurance or are considering buying a policy, be sure to consult with an insurance professional who specializes in this product.